Regional Markets: Focus on Japan (2010)

In the so-called ‘Land of the Rising Sun’ there was a distinctly overcast disposition for the country’s gas market in 2009.

Although the North Pacific Rim region was one of the few regional markets to show industrial gas growth in 2009, much of this is attributable to China – and not Japan.

In the shadow of ever-buoyant Chinese growth, in contrast Japan has endured something of an ordeal at the hands of the recession. It was only in our November issue last year that The Gas Review’s Izumi Ohe described the Japanese gas demand slump that occurred throughout much of 2009.

Ohe noted how government stimulus had begun to take effect and a newly spirited steel sector had improved oxygen consumption.

Since then, the Bank of Japan has revealed further measures to boost its economy and tackle deflation, injecting up to $114bn into the economy via short-term loans to banks. As part of efforts to encourage increased lending to businesses and individuals, the Bank of Japan believes the action will “firmly support Japan’s economic developments toward recovery.”

Such an added stimulus would support the industrial gas companies in Japan towards their growth expectations, while also supporting the strongly held view that a full-scale recovery will take place this year.

Impact of recessionImportant to this could be the recovery in manufacturing activity in Japan’s export industry.

As the world’s second largest economy (by nominal GDP) and the world’s fourth largest exporter, Japan really felt the effects of a deflated export market and sequential slumps in both the steel and manufacturing industries. Demand for a range of gases, especially oxygen, declined as a result.

This was a point made by Hiroshi Aoki last year, as Chairman, President and CEO of Air Water Inc. and November interviewee of the month for gasworld magazine.

Aoki explained, “The influence of the global economic downturn in the domestic market started with declining manufacturing activity in the export industry and reached into business investment and consumer consumption.”

“As a consequence, the onsite business experienced large production cuts – especially in the steel, petrochemicals, and electronics industries, who are the major users for industrial gas. The reduction of industrial gas demand in the steel industry was severe, even compared to examples throughout recent history. [The] Bulk and cylinder business experienced low performance as well, due to decreasing demand from construction business in the civil sector and private investment.”

Falling revenuesAir Water Inc. is one of Japan’s bigger industrial gas players and the Osaka-based company witnessed curbed gas consumption last year.

With strong roots in a number of non-cyclical sectors however, the company perhaps didn’t quite experience the sudden slump that fellow major TNSC did. Sales of TNSC during the first quarter of 2009 were down by 22.6% over the same quarter of the previous year, while Air Water sales were thought to be down 8.7% for the same comparable period.

In addition, third-placed Iwatani and Japan Air Gases too, were estimated to have endured notable declines in levels of earnings and profits.

The fall in sales and revenues in Japan is perhaps concealed by the encouraging performance of the North Pacific Rim (NPR) region as a whole. According to figures from Spiritus Consulting, the NPR market registered growth in revenues of over $1bn alone.

The market was valued at $12.4bn in 2008 and is expected to have reached $13.5bn by the close of 2009. In fact, so positive was its business against the backdrop of recession, that the NPR was the best-performing regional market in the 2009 global industrial gas business.

This is a trend that is expected to continue this year, consistent with the compounded annual growth rates (CAGR) projected by Spiritus; the consultancy group anticipated a CAGR of 10% for the region between 2003-2008 and projects a CAGR of 9.2% for the five year period of 2008-2013.

That too, is the highest percentage growth rate of any of the regional markets in the period 2008-2013 and should see the NPR market gain significant ground on its fellow gas markets around the world.

By close of this year (2010), the NPR industrial gas business is expected to be worth $14.7bn and growing to a further $16.2bn in 2011.

With that projected CAGR of 9.2%, this should rise to $17.8bn in 2012 and a huge $19.3bn by 2013 – if initial projections are to be believed. That would align the NPR industrial gas business much closer to the levels of both Western Europe (projected $20bn in 2013) and North America (projected $24bn, 2013).

Recovery in 2010While much of the aforementioned growth in the NPR is attributable to China’s rapidly growing industrial gas market, industry has been recovering in Japan and there’s a positive mood as we enter 2010.

We’re not talking about eruptions of optimism from this archipelago of volcanic islands just yet, but for those in the know, there’s reason to be positive.

Air Water’s Aoki told us, that the large scale onsite and bulk business for the steel, petrochemicals and electronics industries has been recovering and while the cylinder business (which is heavily used in the construction industry) is not showing signs of recovery just yet, this will eventually happen and manufacturing industries will recover with the revival in export business.

Aoki added, “We estimate that the actual economic rebound would be in late 2010, but industrial gas demand in 2009 will recover to the level of 80-90% of the 2008 level.

Japanese manufacturers should proceed with facility and R&D investment aggressively, in order to precede the current position as the supply base of high quality products in the global market.”

Reaching outIf growth and progression is to be sustained in Japan, it’s thought that the country’s gas companies will need to adopt broader business portfolios, explore new opportunities and even look to neighbouring China.

Investing in a balanced business mix and also keeping an eye on the growth prospects in China is something that Osaka-based Air Water Inc, for example, is undertaking.

Aoki explained, “We would like to aim for sustainability as a long lasting company with stability and growth power, by not heavily depending on the industry-related business, but instead balancing our business portfolio with consumer-related businesses.”

“The Chinese market will be more and more important for manufacturers in Japan and therefore its highly possible that many companies may embark on China. On the other hand, decreasing domestic manufacturing is inevitable, and Japanese industry cannot ignore its importance as the closest adjacent country with the biggest developing market. We have to say the Chinese market contains both advantageous and disadvantageous aspects.”

At the same time, opportunities for development still exist in the large and medium scale onsite business in the steel and petrochemicals sectors, and for bulk and cylinder gases in other applications, we understand.

Furthermore, as is the case with most of the regional markets around the world, opportunities exist for making efficiency gains and squeezing out every element of added value. This is something JAG recognises and is keen to address, having announced in late November (2009) that the company would be making several structural changes in the quest for sustainability.

JAG revealed a number of personnel changes, as well as the reinforcement of its regional sales organisation and reinforcement of its business divisions. The company is replacing its 10-region sales structure with the creation of four main sales areas in East Japan, Chubu, Kansai and West Japan – supported by local sales offices.

Highlighting the need for enhanced value and efficiency, JAG President Francois Jackow explained, “With the globalisation and the recent economic crisis, more and more changes are impacting Japan. As part of the world leader in gases for industry, health and the environment, Air Liquide Group, we need to proactively transform our organisation to deliver value, innovation and efficiency to our customers and partners in Japan.”

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